European Management Journal Vol. 18, No. 1, pp.
52–62, 2000
Pergamon
PII: S0263-2373(99)00068-7
Linking Intangible
Resources and
Competition
KNUT HAANES, Norwegian School of Management
ØYSTEIN FJELDSTAD, Norwegian School of Management
Recent strategy literature suggests that intangible
resources — in particular competencies and
relationships — are critical drivers of competitive
advantage. However, there seems to be a lack of
understanding of when certain types of com-
petencies and relationships are most critical. This
paper introduces a framework consisting of three
fundamental levels of resource-competition. The
framework is illustrated through the pharmaceut-
ical industry. We argue that (1) biotech firms mainly
engage in entrepreneurial competition; (2) tra-
ditional pharmaceutical firms — here referred to as
big-pharma — increasingly undertake contractual
competition and, finally, (3) generic drug makers
compete predominantly operationally. The paper
argues that intangible resources contribute differ-
ently to competitive advantage depending on level
of competition.  2000 Elsevier Science Ltd. All
rights reserved
Introduction
Lately, there has been an increasing stream of strat-
egy literature declaring the importance of intangible
resources in explaining firms’ competitive advantage
(e.g. Itami, 1987; Barney, 1991; Normann and Rami-
rez, 1993). A review of this literature concludes that
competencies and relationships are increasingly con-
sidered to be the most critical firm-specific
resources, but also finds a lack of elaboration of
which types of competencies and
relationships are most
important (Haanes
and
52
 2000 Elsevier Science Ltd. All rights reserved
Printed in Great Britain
0263-2373/00 $20.00
Fjeldstad, 1999). In this paper we link
these observations to a framework con-
sisting of three fundamental levels of
resource-competition, each respective
level requiring specific types of com-
petencies and relationships. Then, we
link our framework to the pharma-
ceutical industry. This industry is
suitable for illustrating the three lev-
els of resource-competition due to
several factors, in particular the
important role of patents as an isolat-
ing mechanism protecting technical
innovations from instant diffusion
(Rumelt, 1987).
The paper argues that intangible
resources contribute differently to
competitive advantage
depending on level of compe-
tition. By elaborating the com-
petitive nature of intangible
resources this approach may
help managers better under-
stand their firms’ resources,
and thereby align com-
petitive moves with
the firm’s dominant
logic (Prahalad
and
European Management Journal Vol 18 No 1 February 2000
 LINKING INTANGIBLE RESOURCES AND COMPETITION
Bettis, 1986). We draw attention to the idea that all
competencies and relationships are not equally
important, and that the importance to a large degree
depends upon how it supports the way of competing.
For instance, according to this approach, a firm with
competencies and relationships that support
efficiency (e.g. facilitating the flow of goods, ‘just-in-
time’ delivery of supplies, etc.) should be careful
about competing to create wholly new technologies.
Conversely, a firm with competencies that support
innovative behavior is often well advised not to take
its new product ideas to the point where it competes
head-on with specialized manufacturers. Developing
appropriate resources is an expensive and time-con-
suming effort (Dierickx and Cool, 1989), and the
extant stock of resources largely decides how the firm
can compete in the short- and medium-term
(Penrose, 1959). Our arguments thus follow the path
dependent assumptions of the resource-based view
(Barney, 1991).
Theoretical Background
Two perspectives in strategic management are parti-
cularly relevant for understanding how firms deploy
scarce resources to create superior value. These are
the resource-based (Wernerfelt, 1984; Barney, 1991)
and the activity-based (Porter, 1985, 1996; Stabell and
Fjeldstad, 1998) views. These perspectives are comp-
lementary. The resource-based view focuses on what
the firm has, whereas the activity perspective focuses
on what the firm does. However, as the essence of
strategy is to combine the two foci, namely to under-
stand how to create an appropriate value with scarce
resources, we will look at how to bridge them.
The Resource-based View
The underlying approach of the resource-based view
is (1) to see the firm as a bundle of tangible and intan-
gible resources, and (2) to see some of these resources
as costly to copy and trade. According to Barney
(1991), a firm’s resource position can lead to sus-
tained competitive advantage if it allows the firm to
create value; if the resources are rare and imperfectly
imitable, and if the advantage is not subject to substi-
tution. Moreover, in order to become a source of sus-
tained competitive advantage, the resources also
have to be organized, combined and deployed appro-
priately. Resources may be difficult to imitate due to
isolating mechanisms such as historical conditions,
time compression diseconomies, ambiguity in the
relation between the resources, or simply because the
value created with the resource is socially complex
(Dierickx and Cool, 1989). This stream of research is
influenced both by previous work illuminating firm
heterogeneity (e.g. Barnard, 1938; Selznick, 1957; Pen-
rose, 1959) and by an economics-based reasoning:
firms are seen as rent seekers (Rumelt, 1987).
European Management Journal Vol 18 No 1 February 2000
The literature generally distinguishes between tan-
gible and intangible resources (Itami, 1987). Tangible
resources are concrete and tradeable, and include
physical entities such as factories, technology, capital,
raw material and land. Intangible resources are gen-
erally more difficult to transfer than tangible
resources, as the value of intangible resources is dif-
ficult to define and measure. Intangibles include
skills, knowledge, relationships, culture, reputation
and competencies. Although both tangible and intan-
gible resources may be scarce and represent the input
needed to create economic value (Lippman and
Rumelt, 1982), competencies have received particular
attention as potential sources of sustained competi-
tive advantage in this literature. Competencies are
the means by which a firm deploys resources in a
characteristic manner in order to compete. Thus,
competencies integrate skills and knowledge, and
organizational competencies include the firm’s
knowledge, routines and organizational culture. In
different ways, several authors have identified com-
petence as the crux to superior organizational per-
formance. In particular, Prahalad and Hamel’s notion
of core competence is important (Prahalad and
Hamel, 1990). Here, competence is seen as competi-
tively important due to three factors. First, a core
competence potentially provides access to a wide
variety of markets. Second, it may make a significant
contribution to the perceived customer’s benefits of
the end products, and third, it is difficult for competi-
tors to imitate or otherwise substitute. In addition,
the value of competencies does not depreciate with
use — the way raw materials and other more tangible
resources do — but rather increases. Competencies
may lead to increasing returns and sustain long-term
economic growth. Other contributions that add to
our understanding of competencies in competition
include the notions of absorptive capacity (Cohen
and Levinthal, 1990), architectural knowledge
(Henderson and Clark, 1990), distinctive com-
petencies (Selznick, 1957) and dynamic capabilities
(Teece et al., 1997).
The Activity-based View
The activity based perspective was for a long time
mainly concerned with seeing firms as value chains
(Porter, 1985), i.e. as systems where value is created
by transforming a set of inputs into more refined out-
puts. The strategic challenges associated with manag-
ing a value chain are related to manufacturing pro-
ducts with the right quality at the lowest possible
cost. The ways to reduce costs — or increase value —
are primarily found through economies of scale,
efficient capacity utilization, learning effects, product
and information flows, and quality measures. Critical
drivers of value creation in chains also include the
interrelationships between primary activities, on the
one hand, and product development, marketing and
service, i.e. support activities, on the other hand.
Today, this approach has been extended to also
53
LINKING INTANGIBLE RESOURCES AND COMPETITION
explain other ways of creating value, such as through
networks (Normann and Ramirez, 1993) and value
systems (Porter, 1996). Stabell and Fjeldstad (1998)
formalized three types of value creations into a ‘value
configuration’ framework. In addition to the value
chain, they introduced the value network and the
value shop. Value networks create value by
mediating products or services between customers.
The value is found in how the specific network gives
buyers access to sellers of what they want, and vice
versa. The value shop creates value by solving
unique problems for customers. Value is created by
mobilizing resources (Haanes, 1997) — essentially
relevant competencies — to solve particular prob-
lems. Problem-solving involves developing solutions
tailored to problems that the clients will not — or
more often cannot — solve themselves. In order to
determine which type of value creation takes place
in a given firm, we need to look at what the firm gets
paid for by their customers.
❖ Value chains sell products that are the outcome of
a transformation process. The customers pay for
the total quality of the product. Examples of firms
that create value as chains include producers of
automobiles, clothing, electronics, food, com-
puters, furniture and pharmaceuticals.
❖ Value networks sell mediation between cus-
tomers. The customers pay for access to and inter-
action with other customers. Examples of compa-
nies creating value as networks include
commercial banks, airlines, postal agencies,
insurers, brokers, stock exchanges and overnight
delivery companies.
❖ Value shops sell competencies and approaches to
help solve certain unique problems. The cus-
tomers pay for solutions of, or effort spent on,
their problems. The latter reflects the fact that
problem-solving is uncertain, and that customers
in many cases are willing to pay for expected
rather than realized value (Levitt, 1981). Examples
of companies that create value as ‘shops’ include
accountants, academics, investment bankers,
physicians, designers, lawyers, business consult-
ants and consulting engineers.
Bridging the Two Perspectives
Resources per se do not create value (Penrose, 1959,
Porter, 1991). Rather, value creation results from the
activities in which the resources are applied. Strang-
ely, there is not yet an explicit link between these
two perspectives. Although researchers today have a
deeper and more sophisticated understanding of
competencies and activities separately, there is still a
need for a more developed understanding of how
and when certain competencies are most appropriate
to obtain competitive advantage. One may make
some general observations about the current status
of these two complementary perspectives:
54
❖ Resources are generally agreed to represent an
appropriate unit of analysis for explaining com-
petitive advantage (Wernerfelt, 1984; Barney,
1991);
❖ Competencies and relationships are often con-
sidered to be the most critical types of resources
(Itami, 1987; Normann and Ramirez, 1993).
❖ Activity-based — or more precisely value con-
figuration — analysis is a widely accepted tool for
determining on which basis the firm may build a
competitive advantage (Porter, 1985; Stabell and
Fjeldstad, 1998).
❖ There is a need for a more developed understand-
ing of the nature of resources in action (Black and
Boal, 1994; Haanes, 1997; Majumdar, 1998).
Hence, one may argue that the current perspectives
in strategic management have the shortcoming that
intangible resources, such as competencies and
relationships, are not yet linked to how firms create
value and to how they compete in their industries.
Consequently, there is not yet a distinction
explaining when certain competencies and relation-
ships are most critical.
Three Levels of Resource-competition
The study of how firms compete is the essence of
the academic field of strategy. This framework helps
better understand how resources can be mobilized to
compete. There are many other useful dimensions of
competition in addition to the one presented here,
such as price competition, technology competition,
competition for standards, service competition, etc.
We will, however, argue that this specific approach
complements and extends other approaches by
specifically linking types of resources to ways of
competing.
Resource-competition may be classified into three
different levels. First, operational competition is con-
cerned with efficiency in the production process
(Porter, 1996). This can be gained through scale and
experience, as well as by substituting capital for
labor. At the other extreme of the competitive spec-
trum lies entrepreneurial competition. This implies the
more Schumpeterian sources of performance advan-
tage, which result from the formation and implemen-
tation of entirely new combinations (Schumpeter,
1934). Both the operational and the entrepreneurial
level of competition are well captured by the activity-
based perspectives in strategy (e.g. Porter’s distinc-
tion between cost leadership and differentiation), and
by other organizational theories [e.g. the distinction
between exploration and exploitation (March, 1991)].
Moreover, the resource-based perspective (e.g. Wer-
nerfelt, 1984; Barney, 1991) helps us distinguish a
third type of resource-competition. This implies the
effective appropriation and mobilization of certain
European Management Journal Vol 18 No 1 February 2000
 LINKING INTANGIBLE RESOURCES AND COMPETITION
imperfectly traded resources. We here label this con-
tractual competition. This level of competition has pre-
viously been alluded to by Miles and Snow (1978) as
the activities associated with the ‘analyzer’, a type of
firm that screens the environment for interesting
ideas and then moves relatively early to realize these
commercially. However, whereas the approach of
Miles and Snow was to create a typology of firms,
our focus is to identify levels of competition and
types of intangible resources.
The three levels of resource-competition are dis-
tinctly different:
❖ Entrepreneurial competition implies performance
in the creation of new technologies or entirely
new solutions;
❖ Contractual level competition implies perform-
ance in expanding the available set of non-freely
traded resources that can be applied to a given
technology;
❖ Operational competition implies efficiency in the
actual transformation of freely traded input fac-
tors into products and services.
At each level of resource-competition, distinct categ-
ories of associated competencies contribute to
superior performance. However, the differences
between the three levels are a matter of degree, and
we do not pretend that the boundaries between these
can be easily defined. Most firms will to some extent
engage in resource-competition on all three levels.
Nevertheless, one level will often be dominant in the
way a business unit competes.
Entrepreneurial-level Competition
At the entrepreneurial level, the creation and modi-
fication of technologies and products departing from
past solutions is the meta-activity. This implies explo-
ration (March, 1991). Exploration is associated with
the long-term, and implies experimentation and
search for new opportunities, technologies, strategies
and competencies. The returns to exploration are dis-
tant in time and space. It takes time to create value
with a new exploration, and even if a new product
is realized the value may be appropriated by other
organizations (Teece, 1986). Applying a short time
perspective to exploration makes all new ideas look
bad, whether they are good or bad. A firm that only
explores puts itself at a short-term risk, as it neglects
present opportunities. Entrepreneurial level compe-
tition changes the pattern of resource deployment on
two levels simultaneously. An emerging industrial
logic is formed on both a new architecture and new
components (Henderson and Clark, 1990). The archi-
tecture refers to the way components are put together
in the industry, whereas the components refer to each
specific portion of the product. Both change dramati-
cally in the early stages of the industry, as different
European Management Journal Vol 18 No 1 February 2000
companies experiment with new combinations. As
noted by Mansfield (1977), products in an emergent
industry do not emerge fully developed. Neither do
the commercial aspects of the industry, as experimen-
tation with different business models takes place.
Hence, it may eventually create great difficulties for
established firms (Utterback, 1994) which offer close
substitutes. Entrepreneurial competition is made dif-
ficult by the ‘failure trap’. The firm comes up with
new ideas, but does not have the necessary patience
to wait for the payback. This may lead to a vicious
circle, where the firm continuously creates new con-
cepts but where the ideas spill over to competitors
who manage to appropriate their value.
Contractual-level Competition
On the contractual level, firms compete on the appro-
priation of scarce resources used by a given tech-
nology in an imperfect resource market. In order to
mobilize imperfectly traded resources, the contrac-
tual challenges are to identify and understand market
potential where it is not yet developed and then to
fast build a commercial structure. Contractual com-
petition is about building systems to commercialize
new technologies, many of which have been intro-
duced outside the company. Contractual competition
consists of two main activities. First, screening the
environment for interesting novelties with a commer-
cial potential, and second, establishing a set of con-
tracts to actually commercialize the selected novel-
ties. In order to develop contractual-level competitive
advantage, support activities such as procurement,
human resource management and marketing can be
critical. Performance advantage is not related to
superior implementation and execution of the given
technology, but rather to its extension to a larger
market domain than the initial innovators. This
means finding a market potential that has not yet
been realized. For instance, it is well known that
many of the basic concepts of Apple’s Macintosh
computer (such as the mouse and the user interface)
first originated in Xerox Parc, but that Xerox were
not capable of commercializing these (and many
other) ideas.
Operational-level Competition
In operational-level competition, firms are seen to
obtain competitive advantage through superior
execution of activities, based on established techno-
logies. In operational competition, the technology is
generally taken for granted and the firms look for
performance in terms of (1) scale and scope, and (2)
efficient implementation. Drivers of performance in
operational competition include learning effects,
capacity utilization, vertical integration and links
between activities (Porter, 1985). The fundamental
activities in entrepreneurial and contractual compe-
tition were exploration and expansion, respectively.
55
LINKING INTANGIBLE RESOURCES AND COMPETITION
In operational competition the fundamental activity
is exploitation (March, 1991). Exploitation refers to the
short-term improvement and refinement of present
knowledge, opportunities and technologies. A firm
that puts too much emphasis on exploitation risks not
surviving in the long-term, because it neglects build-
ing knowledge to seize new opportunities. The ‘suc-
cess trap’ is associated with too much exploitation,
i.e. the firm being satisfied with the returns on
exploiting present knowledge and technologies.
Present recipes will easily lead the firm to continue
exploiting at the neglect of exploration, which is
necessary in the long-term.
Figure 1 is meant to illustrate the three levels, not to
suggest that all firms fit neatly into one. Some firms
actually succeed in all three. Intel in microprocessors
is an example of this, having gone from the early dis-
covery to today also being the most efficient pro-
ducer.
The three types of resource-competition will tend to
have a chronological sequence for a given tech-
nology. A new industry emerges through entrepren-
eurial action, implying experimentation and the dis-
covery of a technological opportunity. Often, many
competitors with similar motives, but with different
technologies, emerge at the same time. Utterback and
Abernathy (1975) noted that this stage is charac-
terized by uncoordinated activity, and that each actor
tends to be inefficient and have slack. The firms are
often small and purely technology oriented, and
incumbents often overlook them. Their competencies
are often more advanced when it comes to the possi-
bilities with the technology than when it comes to
grasping the commercial opportunity — or more cor-
rectly; understanding how to develop the commercial
opportunity. Then, contractual activity develops the
commercial industry, which often results in a domi-
nant design (Abernathy and Utterback, 1978), both in
terms of technology and markets. Here the actors
find efficient systems and solutions. Finally, when the
Figure 1 Three Levels of Competition
56
industry is well-defined and a factor market estab-
lished, there is room for operational activity. This is
about winning the head-on competition through
lower costs and efficiency, and at this stage improve-
ments will tend to be slower and more incremental.
For the purpose of this paper it is important to note
that the competencies required to compete efficiently
varies with the level of resource-competition. This
has important implications for strategy.
Competition in the Pharmaceutical
Industry
The pharmaceutical industry provides an interesting
illustration of this framework for several reasons.
First, this is an intensely competitive and global
industry with a strong focus on innovation. The fun-
damental challenge for most firms in the industry is
to create patented drugs that can be commercialized
internationally. The companies in the industry aver-
age R&D investments of more than 20 per cent, and
the total research and development investment is
expected to hit $24 billion in 1999 (Hess, 1999).
Second, the patent protection and the required medi-
cal approval (e.g. by the US Food and Drug Adminis-
tration [FDA]) create well-defined isolating mech-
anisms. These make each product imitation difficult,
but on the other hand facilitate technology diffusion.
Finally, this is an industry with extensive competition
and cooperation between both small and large com-
panies. This article merely presents an overview of
the industry for illustrative purposes. For a richer
and more detailed analysis of strategic groups in the
pharmaceutical industry, see Bogner and Thomas
(1996).
The creation and manufacturing of drugs has become
one of the largest and most profitable industries
European Management Journal Vol 18 No 1 February 2000
 LINKING INTANGIBLE RESOURCES AND COMPETITION
worldwide. The annual sales of medical drugs total
$300 billion, with a profit margin that has been esti-
mated at 30 per cent (Economist, 1998). The tra-
ditional actors in the industry, namely the integrated
pharmaceutical firms, have been undergoing large
changes during the last decade as a consequence of
(1) increased buyer pressures (particularly from
Governments and HMO’s), (2) harder price compe-
tition from generic drug makers, and (3) innovative
pressures from biotech companies. The industry can
as a consequence increasingly be analytically divided
into three levels of competition, i.e. that undertaken
by: (1) traditional pharmaceutical firms, (2) biotech
firms, and (3) generic drug makers. This division into
different ways of competing is not clear-cut with
regards to all firms, however, as many corporations
undertake all three forms of competition. For
instance, the big-pharma firm Roche owns over 80
per cent of Genentech, a major biotech firm. Simi-
larly, both Novartis and Merck, large traditional
pharmaceutical companies, are also producers and
distributors of generic drugs. In addition, there are
numerous alliances between biotech firms and big-
pharma firms. These collaborations seem to affect
innovation positively, and there is often a mutual
dependency between these two types of firms (Shan
et al., 1994).
Time pressures have accelerated the division of labor
in the industry for at least two reasons. First, it takes
a long time to develop a new drug and second, once
developed, the company needs to break-even fast in
order to be profitable before the patents run out. On
average it takes 15 years to develop a new drug, and
it costs more than $400 million. Although firms that
produce a successful drug are protected through
their patents (normally for 20 years), there is a high
pressure to save time in commercialization. Only 30
per cent of all drugs introduced ever break-even
(Gimartin, 1998). High R&D investments, as well as
marketing costs, have to be recouped before a given
drug becomes profitable. Hence, most biotech firms
simply do not have the time or resources to grow
organically, even if they have developed a drug with
a high market potential. It often turns out that tra-
ditional pharmaceutical firms — which often them-
selves face declining returns to scale in terms of inno-
vation (Graves and Langowitz, 1993) — have
competencies and relationships that make them bet-
ter suited for efficient commercialization. Below, we
will look at the three types of competition in the
pharmaceutical industry.
Entrepreneurial Competition — Biotech Firms
Biotechnology can be defined as the integration of
natural science and engineering science in order to
develop products and services based on the appli-
cation of organisms, cells and molecular parts.
Biotechnology is, however, not a narrowly consti-
European Management Journal Vol 18 No 1 February 2000
tuted technology. It is comprised of many interdisci-
plinary skills and techniques, with wide-ranging
applications. Biotechnology can also be described as
an enabling technology capable of affecting many
areas of industrial, medical, and agricultural activity.
The term biotechnology is often used for ‘genetic
engineering’, which has emerged during the last dec-
ades. This includes recombinant DNA techniques,
established enzyme technology, monoclonal anti-
bodies, as well as instrumentation technology for the
automated sequencing of DNA, proteins and the syn-
thesis of peptides. The biotech industry has from its
inception been closely linked to the pharmaceutical
industry, and there are today more than 2000 ‘biome-
dicine’ firms. As of 1999, more than 2200 biotech-
based medicines are in various stages of clinical test-
ing, and some 350 drugs are in the process of seeking
approval by the FDA. Of these, 30 per cent are in the
late stages of this process. Biotech firms are important
technical innovators. They are generally smaller than
traditional pharmaceutical companies, and they are
often spin-offs from universities and research entities
(Powell et al., 1996). Only three biotech firms —
Amgen, Chiron and Genentech — had 1998 turn-
overs that exceeded $1 billion. Many biotech firms
function almost as basic research labs, utilizing their
small size and targeted competencies to develop new
ideas and to produce technical breakthroughs.
Producing innovation requires certain competencies,
such as an advanced understanding of the basic tech-
nology underlying the respective biotech firm’s area
of activity. Successful biotechnology firms live on the
innovation edge, and need to master the state-of-the-
art in their chosen activity. Furthermore, they need
the ability to learn from formal and informal collab-
oration. Typically, many such partnerships are found
with universities. As seen by the manager of a
biotechnology company we studied: ‘We were really
very fortunate because we could start cooperating
with researchers on the cellular applications for the
future. In this way we evolved with our customers.’
Biotechnology firms typically have the willingness to
experiment with new designs. Their raison d’etre is
prototyping entirely new concepts. In essence, the
competence that distinguishes a successful biotechn-
ology firm is its ability to grasp and diagnose new,
unique problems and to come up with innovative sol-
utions. Advanced problems are often accessed
through the research network. Participating at the
frontier of research provides the biotech firms lever-
age to access, assimilate, and exploit additional ideas
and information. R&D collaboration both gives
access to an information network and represents a
vehicle for the rapid communication of news about
market possibilities and obstacles (Kreiner and
Schutz, 1993). Hence, successful biotech firms have
intangible resources that assist in the identification
of, and inquiry into, new problems, including a net-
work to access relevant technological competencies
and access to advanced know-how.
57
LINKING INTANGIBLE RESOURCES AND COMPETITION
In fact, biotech firms need to build relationships that
support entrepreneurial competition. These relation-
ships include (1) access to leading customers, and (2)
access to technical knowledge. These relationships
are usually of both a formal and an informal nature.
Both types of networks facilitate new idea generation,
in terms of new market solutions or new technical
solutions. For instance, having links to other knowl-
edge-intensive firms may help the firm pick up new
ideas and stimulate to think in new ways (Porter,
1990). Such relationships might include cooperation
with research centers, etc. This requires that the firm
is open to learn from customers and suppliers. As
argued by Powell et al. (1996, p. 121) in a study of
inter-firm collaboration between biotech firms:
‘…once a firm begins collaborating, it develops experience at
cooperation and a reputation as a partner. Over time, firms
develop capabilities for interacting with other firms. Experience
with collaborative networks proves a fertile ground for both
further formal partnerships and an expanding array of informal
relationships. A broader range of collaborative efforts provides
greater opportunity to refine organizational routines far coop-
erating and render them more versatile.’
The relationships of successful biotech firms gener-
ally include links to ‘idea rich’ surroundings, such as
research institutions, other biotech firms and
advanced pharmaceutical companies. These allow
the firms to pick up new ideas, to think in new ways,
and to put an intense research commitment behind
new technological innovations. In addition, they rep-
resent ‘reservoirs’ of available competencies that may
be mobilized when new opportunities are seen.
Contractual Competition — (‘Big’ Pharma)
Traditional Pharmaceutical Firms
The traditional pharmaceutical industry has been
very profitable and R&D intensive, and this trend is
predicted to continue due to ongoing advances in
technology and an aging population in the largest
markets. The traditional pharmaceutical firms (here
called ‘big-pharma’) encompass some of the world’s
largest and most profitable firms altogether. For
instance, Merck, Roche, Glaxo and Novartis each had
a 1998 turnover exceeding $7 billion. The high risks
and increasing costs of product development, never-
theless, does affect how the large pharmaceutical
companies organize innovation. Although they still
undertake extensive research and development
internally, increasingly the discovery of entirely new
solutions originate in biotech firms and research lab-
oratories. Therefore, we see more joint ventures with
biotech companies with interesting technologies. In
fact, many large pharmaceutical companies seem to
prefer cooperation to acquisition, even if the take-
over price is no hindrance (Bower, 1993). This is
partly due to the fact that biotechnological inno-
vation is foreign to pharmaceutical firms, which have
58
traditionally based their research on organic chemis-
try.
The current focus of big-pharma firms is to identify
promising discoveries and then to take these through
testing and approval onto the market. The approval
process requires a large investment, where the big-
pharma firms possess internal laboratories, links to
clinical hospitals and experience in managing the
FDA approval procedure. These are critical resources
in the commercialization process. Once a drug is
accepted, the big-pharma firms use their global sales
and marketing networks to commercialize it. Increas-
ingly, the big-pharma firms also have a contracting
approach to leverage their know-how in generic
drugs towards the end of the patent life-cycle. The
critical competencies for big-pharma firms include
their ability to screen and understand potential com-
mercial breakthroughs (often made in research-inten-
sive companies, e.g. biotech firms). This requires
competitive intelligence and a blend of technological
and commercial knowledge, i.e. an absorptive
capacity (Cohen and Levinthal, 1990). Contractual
competition requires an understanding of the poten-
tial market and an ability to organize a web of
internal and external contracts. The relationships that
are important for big-pharma firms include a large
set of contacts into research settings in order to screen
new opportunities. Moreover, it is an advantage to
have an established reputation as a serious collabor-
ative partner. Finally, in order to sell and market new
products, the big-pharma firms need good relations
to physicians, pharmacies and other large customer
groups, as well as a brand name that facilitates the
introduction of new products. In sum, two important
resources of big pharma firms are contactability, an
ability to access and manage contacts in many areas,
and contractability, a reputation for trustworthiness.
Operational Competition — Generic Drug
Manufacturers
Generic drug manufacturers produce generic drugs.
A generic drug is called by its basic chemical name
instead of a registered brand name, which is usually
held by big-pharma. In general, generic drug makers
do not undertake R&D themselves. Rather, they start
producing ‘me too’ products once the patents of orig-
inal products have run out. Generic drugs have the
same active ingredients as brand-name drugs. If a
physician prescribes a generic drug instead of a
brand-name product, good standard practice and
most countries’ laws require that it be therapeutically
equivalent. In addition to not having a brand name,
the generic drugs are often priced much lower.
Today, managed care organizations affect the pharm-
aceutical business in every significant market seg-
ment. As those organizations have continued to grow
in size and influence, they have increasingly
demanded discounts from pharmaceutical compa-
nies. This has provided the generic drug makers,
European Management Journal Vol 18 No 1 February 2000
 LINKING INTANGIBLE RESOURCES AND COMPETITION

such as Mylan Laboratories, Teva Pharmaceuticals, Discussion and Conclusion

Barr Laboratories, Ivax, etc. with a growing market
opportunity. Also, in many countries the generic
drug makers have been helped by an increasing
reluctance by governments to pay high prices for
original drugs. Moreover, some big-pharma firms
have also entered into generic drug manufacturing
in order to expand their volumes and capitalize on
already incurred plant investments.
The focus of generic drug manufacturers is on
efficiency (in order to compete on price). The com-
petencies required to compete operationally are
mainly linked to efficiency in production. This
includes the ability to identify a scope for economies
of scale and capacity utilization, as well as for better
linkages between the different activities. They are
also connected to an efficient flow of goods. This
implies the ability to gradually improve the logistics
connected to a very complex flow of people, techno-
logies and materials. Another critical competence is
negotiation skills, allowing the firm to continuously
reduce the costs of suppliers by (1) making sure they
reduce costs, and (2) reducing both transaction and
linkage costs. Furthermore, the relationships needed
for generic drug makers to compete operationally
include a set up with suppliers and customers that
facilitates an efficient flow of information and pro-
ducts. Also, close contacts to customers and a limited
number of suppliers may limit transaction costs. The
relationships developed by successful generic drug
makers are largely aimed at cutting cost and improv-
ing flows. This may imply reducing the number of
suppliers and increasing the business with the
remaining partners.
We will argue that the three ways of competing, as
illustrated above, require different competencies and
different relationships. These are summarized in
Table 1.
To summarize, how competencies and relationships
may contribute to competitive advantage differs with
the competitive level. With respect to competencies
we distinguish the exploration-related competencies
needed for successful entrepreneurial action; the
expansion-related competencies needed for success-
ful contractual action, and finally; the exploitation-
related competencies needed for successful oper-
ational action. This framework has been illustrated
with a look at the pharmaceutical industry. We do,
however, believe that also other industries can be bet-
ter understood through this approach.
Developing the market commercially is done through
contractual competition (here by ‘big-pharma’ firms),
often undertaken by larger firms diversifying into the
industry or the new market. These are not usually
first movers, but rather early movers, who have a dif-
ferent focus than the one competing entrepreneuri-
ally (here biotech firms). Whereas companies compet-
ing entrepreneurially explore product and
technology opportunities, the company competing
contractually is concerned with developing the actual
market. The companies that are successful in contrac-
tual competition are innovators when it comes to
understanding and exploiting the market opport-
unity. This framework introduces contracting as a
way of competing that has not yet been discussed
sufficiently in the literature. However, aspects of the
contractual competition have been discussed by
Chandler (1990); Miles and Snow (1978). Chandler,
for instance, found that the most successful industrial
firms were the first to build management (p. 131).:
‘The dominant companies are those whose founders
and senior executives understood …the logic of
managerial enterprise, that is, the dynamic logic of
growth and competition that drives modern indus-

Table 1 The Competencies and Relationships Related to Level of Competition

Level of competition Supporting competencies Supporting relationships

Entrepreneurial competition Know-how in basic technology Networks to access relevant technological

Ability to learn from on-going projects
Ability and willingness to experiment
Ability to solve new problems and come up with
innovative solutions
Contractual competition Understanding of markets, actors and resources
Ability to see commercial opportunity where it
does not yet exist
Ability to organize commercial contracts
Ability to mobilize new and not yet
commercialized resources
Operational competition Efficiency in production and transformation
Quality management in order to reduce
complaints and need for slack
Flow of goods and information
Negotiation skills
competencies
Networks to access advanced problems
Networks to access informal communication
about opportunities and obstacles
Contractability — reputation for trustworthiness
and commercial capabilities
Contactability — many potential relationships in
a wide area of activities (‘loose ties’)
‘Just-in-time’ set-up with suppliers and
customers
Low transaction costs with relevant parties
High bargaining power vis-à-vis vendors

European Management Journal Vol 18 No 1 February 2000 59

LINKING INTANGIBLE RESOURCES AND COMPETITION
trial capitalism.’ Similarly, Miles and Snow identified
the analyzer as a competitive archetype, alongside
the defender (focused on efficiency), the prospector
(innovation) and the reactor (follower). According to
Miles and Snow (p. 68) the analyzer is: ‘…an organi-
zation that minimizes risk while maximizing the
opportunity for profit, that is, an experienced Ana-
lyzer combines the strengths of both the Prospector
and the Defender into a single system’. These obser-
vations, in addition to more recent studies docu-
menting that the early movers, as opposed to first
mover, are the most successful (Tellis and Golder,
1996) seem to suggest that the contracting is a sig-
nificant level of competition. It undertaken by the
company that understands the potential of resources
that are not yet commercially recognized. It is not the
one that develops the technology, but often the one to
appropriate (Teece, 1986) much of its potential value.
This discussion has implications for our understand-
ing of competition and competencies. There are dif-
ferent ways of competing and, consequently, differ-
ent types of competencies that support each way of
competing. This can be stated through a set of prop-
ositions about resource-competition in the pharma-
ceutical industry.
Proposition 1
There are systematic differences in the properties of
competencies and relationships leading to superior
performance in the pharmaceutical industry. These
depend on whether firms compete to (1) create new
technologies (potential products), (2) create new busi-
ness systems based on newly introduced techno-
logies, or (3) compete on price/quality with estab-
lished technologies within established business
systems. These ways of competing are closely asso-
ciated with the biotech firms, traditional pharmaceut-
ical firms and generic drug makers, respectively.
We will deal with these levels in turn below. First,
entrepreneurial level competencies allow the devel-
opment of new solutions. This may include intimate
knowledge of state-of-the-art in basic research, or a
deep knowledge about the market. Relevant com-
petencies are correlated with innovative efficiency
(Cohen and Levinthal, 1990). This includes attracting
creative people, the ability to manage innovation, the
ability to motivate people, and the will to take risks
on unproved solutions. One may create the following
proposition about biotech firms:
Proposition 2
Superior performance as a biotech firm in developing
new product or process technologies requires:
❖ Competencies and relationships that allow the
60
firm to gain unique insights into a technology, and
to combine technological knowledge in new ways.
❖ Competencies and relationships that allow the
firm to learn continuously from experimentation.
❖ Competencies and relationships that facilitate
unique problem-solving.
The competencies that are key to contractual-level
competition are those that allow the firm to expand
rapidly on the basis of existing technologies. To
accomplish this the firm needs superior resources
that support procurement, resource management and
marketing when facing imperfect factor and output
markets. The competencies that support contractual
competition encompass (1) the ability to see commer-
cial opportunities in the market for existing techno-
logies, and (2) the ability to access the resources to
seize the opportunities. Accessing (imperfectly
traded and imitated) resources requires both the
ability to manage a variety of contractual mech-
anisms simultaneously and a broad network reach.
For instance, when operating in imperfect output
markets, the firm needs competencies to build
brands, trust and loyalty to all parties, including the
suppliers of competence (i.e. the employees and other
contractual parties). These relationships must allow
the firm an extensive reach within the relevant
domain. This leads to the following proposition
about traditional pharmaceutical firms:
Proposition 3
Superior performance in the pharmaceutical industry
for drug firms in terms of developing new business
systems requires:
❖ Competencies and relationships that allow the
firm to understand the potential of a not yet fully
developed product (that may well have been
developed elsewhere).
❖ Competencies and relationships that allow the
firm to organize a nexus of contracts in order to
build the business system and develop the market.
❖ Competencies and relationships that allow the
firm to access technologies and mobilize the
resources that allow commercial exploitation of
the technology.
Finally, operational-level advantages stem from the
efficient implementation of primary activities. The
intangible resources that are key at this level facilitate
resource acquisition efficiency, with the aim of cost
reduction. This requires competencies in manufactur-
ing, logistics, negotiations, as well as the ability to
retain quality and improve incrementally. Sustaining
operational level advantages requires competencies
that optimize the use of resources and, thus, give an
advantageous cost position in the chosen segment
(Porter, 1980). Therefore, firms that compete oper-
ationally need competencies to build relationships to
European Management Journal Vol 18 No 1 February 2000
 LINKING INTANGIBLE RESOURCES AND COMPETITION
support operational level performance. Such relation-
ships are linked to efficient resource acquisition.
Examples of such relationships include just-in-time
set-up with suppliers and customers, and the estab-
lishment of bargaining power vis-à-vis vendors.
Finally, one may make the following proposition
about generic drug makers:
Proposition 4
Superior performance within generic drug pro-
duction requires:
❖ Competencies that allow the firm to produce
efficiently.
❖ Competencies and relationships that allow the
firm to get an optimal flow of inputs and outputs.
❖ Competencies and relationships that minimize
transaction costs.
Both contractual and entrepreneurial competition
means combining resources in new ways
(Schumpeter, 1934). The company competing entrep-
reneurially combines resources to create new pro-
ducts, whereas the company competing contractually
takes these new product ideas and develops new
markets. Companies competing operationally (here
generic drug makers) take both products and mar-
kets for granted and focus purely on efficiency. They
innovate in terms of building a system that outcom-
petes the two others on costs (through economies of
scale, capacity utilization, flow of goods manage-
ment, etc.). This requires competencies that support
efficient operations, and these types of competencies
are different from both those required for contractual
and entrepreneurial competition.
This framework may have interesting implications
for managers. First, it helps us better understand
which intangible resources are most critical for our
firm. Second, it may help managers clarify what
kinds of competitive activities their firm is actually
engaged in. It is clearly important to distinguish cre-
ation (of new industries) from operational compe-
tition. Finally, this framework helps us link the three
main levels of strategy, namely competencies, com-
panies and competition. So far, most theories have
been concerned with one of these.
Note. This is an extended version of a paper
presented at the 18th Annual International Confer-
ence of the Strategic Management Society, Orlando,
1998, and at a SCANCOR seminar at Stanford Uni-
versity, January 1999.
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European Management Journal Vol 18 No 1 February 2000